LTV, DTI, and PMI Explained for the Real Estate Exam

What Are LTV, DTI, and PMI in Real Estate?

LTV, DTI, and PMI are three key lending ratios and requirements that lenders use to assess mortgage risk and determine borrower eligibility in real estate financing. The real estate license exam tests all three under Financing with calculation and threshold questions.

LTV (loan-to-value) measures how much of the property’s value is financed. DTI (debt-to-income) measures how much of a borrower’s income goes toward debt. PMI (private mortgage insurance) is the insurance required when LTV exceeds 80% on conventional loans.

This guide covers how LTV, DTI, and PMI work, why they matter for property transactions, the PMI threshold, exam question patterns, and how these ratios relate to different mortgage types. Failing any of these thresholds can result in loan denial or significantly higher borrowing costs.

How Do LTV, DTI, and PMI Work?

LTV, DTI, and PMI work together to determine a borrower’s mortgage eligibility and cost in real estate transactions. Each ratio measures a different aspect of risk, and lenders evaluate all three before approving a loan.

LTV = Loan Amount ÷ Appraised Value × 100. A $180,000 loan on a $200,000 property equals 90% LTV. The higher the LTV, the more risk the lender takes because the borrower has less equity in the property.

DTI = Total Monthly Debt Payments ÷ Gross Monthly Income × 100. A borrower with $2,000 in monthly debt payments and $5,000 in gross monthly income has a 40% DTI. Most conventional loans cap DTI at 43%, while FHA loans may allow up to 50%.

PMI = insurance required when LTV exceeds 80%. PMI protects the lender — not the borrower — by covering losses if the borrower defaults on the loan. PMI typically costs 0.5–1.5% of the loan amount per year.

These three metrics interact directly. High LTV triggers PMI. High DTI may disqualify the borrower entirely. PMI adds to the monthly payment, which increases the DTI. Understanding how these ratios relate to different mortgage types is essential for exam questions that combine financing concepts.

Who does PMI protect? PMI protects the lender — not the borrower — by covering losses if the borrower defaults on the loan.

Why Do LTV, DTI, and PMI Matter for Property Transactions?

LTV, DTI, and PMI matter for property transactions because they directly determine whether a buyer can obtain financing and how much that financing will cost. A buyer who exceeds any of these thresholds faces higher rates, additional insurance premiums, or outright loan denial.

High LTV means higher risk for the lender — resulting in PMI charges and potentially higher interest rates. High DTI signals the borrower may struggle to make payments, which is why lenders cap DTI at 43–50% depending on the loan program.

PMI typically costs 0.5–1.5% of the loan amount annually. On a $200,000 loan, that adds $100–250+ per month to the payment. This cost continues until the borrower builds enough equity to reach the 80% LTV threshold.

These ratios affect every step of the transaction, from pre-approval through the closing process. Agents who understand LTV, DTI, and PMI can better advise clients on down payment strategies and loan program selection.

Can a borrower avoid PMI? Yes — by putting 20% or more down (keeping LTV at 80% or below), using a piggyback loan, or choosing VA or USDA loans, which do not require PMI.

What LTV Ratio Requires PMI?

PMI is required on conventional mortgages when the loan-to-value (LTV) ratio exceeds 80% — meaning the borrower puts down less than 20% of the purchase price. This is the single most tested PMI fact on the real estate license exam.

PMI can be removed by the borrower’s request at 80% LTV. The borrower must have a good payment history and submit a written request to the lender. PMI is automatically cancelled by the lender when LTV reaches 78% through scheduled payments — the lender is legally required to cancel at this point under the Homeowners Protection Act.

FHA loans use mortgage insurance premium (MIP) instead of PMI. FHA MIP cannot be removed — it lasts the life of the loan for most FHA borrowers who put down less than 10%. This is a key distinction the exam tests.

VA and USDA loans do not require PMI at any LTV. VA loans charge a one-time funding fee, and USDA loans charge an upfront guarantee fee plus an annual fee — but neither uses traditional PMI. Knowing the difference between PMI thresholds and discount points helps you answer exam questions about upfront costs versus ongoing costs.

What LTV, DTI, and PMI Questions Appear on the Real Estate Exam?

LTV, DTI, and PMI questions appear on the national portion of the real estate salesperson exam under Financing. These questions test both definitions and calculations.

On the exam, you’ll likely see these patterns:

• “What LTV requires PMI?” — above 80% on conventional loans
• “How is LTV calculated?” — loan amount ÷ appraised value (not purchase price, unless appraised value equals purchase price)
• “What does PMI protect?” — the lender, not the borrower
• “When is PMI automatically cancelled?” — at 78% LTV through scheduled payments

Here’s how to remember the key thresholds: 80% LTV is the PMI trigger, 78% LTV is the automatic cancellation point, and 43% DTI is the conventional loan cap. Know these three numbers cold — they appear repeatedly.

Practice LTV, DTI, and PMI questions on our free real estate practice exam to test your understanding of these financing concepts.

How Are LTV, DTI, and PMI Related to Mortgage Types?

LTV, DTI, and PMI requirements vary by mortgage types — each loan program has different thresholds and insurance requirements. Conventional loans require PMI above 80% LTV. FHA loans require MIP regardless of LTV. VA and USDA loans require no PMI at any LTV.

Understanding how these ratios interact with different mortgage types is essential for exam questions that combine financing concepts. A question might ask which loan program allows the highest DTI or which programs eliminate PMI entirely.

Browse all financing terms in our real estate exam terms study guide.

This information is for educational purposes. Requirements may change — always verify with your state’s Real Estate Commission.